Shire Real Estate Pty Limited v Kersten [2021] NSWSC 1255 | Case summary

Restraint on employment with competing business

The only issue in dispute on this application concerns whether a restraint should be imposed on the defendants limiting the scope of the work which they can undertake with DJP. A consequential application is made for restraints against the defendants from promoting their work with DJP on social media. There was no separate argument on that restraint, and I have assumed that the outcome of the debate about the restraint on employment will govern the outcome of that consequential application.
The restraint clause is essentially the same for each of the defendants. It reads: Without the Employer's prior consent, from the Termination Date, You are not to: … (b) carry on or be engaged, concerned, interested directly or indirectly whether as a shareholder, director, employee, partner, joint venture participant, principal, agent, trustee, unitholder or otherwise, in carrying on any business for a Competitor for the Restraint Period; …
For the purpose of the clause, the term "competitor" is defined as meaning "any business engaged in providing real estate agency services" within a specified distance from the SRE office in Wollongong. In the case of the second defendant, the radius is 7.5 kilometres. In the case of all of the other defendants, it is 15 kilometres.
These clauses are in substantially the same terms as the restraint clause with which I dealt in a decision in September last year: JMB (NSW) Pty Ltd v West [2020] NSWSC 1380. The plaintiff in that case was another McGrath franchisee, this time operating on the Central Coast, which no doubt accounts for the similarity of language used in the contract. The counsel and solicitors who represented JMB in those proceedings represent SRE in the present application.
There are substantial similarities between the facts of JMB and the present case. In particular, one of the main issues with which I dealt in my judgment concerned an application against the defendant for a restraint against employment with a competing business.
Somewhat surprisingly, my decision in JMB does not seem to have been referred to when this matter was before the Court on earlier occasions, and the implications of the case were only mentioned by counsel for SRE in the course of reply submissions provided to the Court today. This was after there had been extensive reference to the case by counsel for the defendants in his written submissions.
The restraint which SRE seeks to enforce, and which JMB sought to enforce in the case last year, is a wide one. Two features in particular stand out. First, the clause fastens on the former employees' participation in a business which competes with that of the employer. It is not necessary that the former employee should actually be engaged in work which competes with the business of SRE. It is enough that the former employee is involved with a person or entity who conducts, perhaps along with other non-competing businesses, a business which competes against SRE.
Second, although the clause begins by referring to the former employee being "engaged, concerned or interested" in the competing business, it expressly includes in that concept "being an employee" of the person carrying on that business. It is not necessary that the employee should have any financial stake in the competing business or any particular level of seniority.
There does not seem to be any dispute that DJP is already engaged in a business which competes with that of SRE, if only because services are being provided to Wollongong customers out of the Bowral office. The effect of the clause is therefore in its terms to prevent any of the defendants being employed by DJP at all, even if their work was confined to properties and customers outside Wollongong, and indeed even if they were not working in real estate sales or management or other agency services at all.
Furthermore, as I noted in JMB at [59], there is a lack of clarity in the concept of "providing real estate agency services" within a particular area. The restraint clause does not identify whether the provision of services is constituted by: 1. having an office in the area; or 2. dealing with customers who live in the area (whether or not those customers own properties in the area); or 3. dealing with customers (wherever they live) with respect to properties in the area.
Initially, SRE's application sought a restraint on all of the defendants in the terms of the clause. Today, apparently in response to the submissions from counsel for the defendant referring to JMB, SRE modified its position by inserting a carve‑out in the restraint sought, which would exempt the defendants from the restraint to a certain extent.
The restraint sought against the second defendant, including the carve‑out, is in the following terms: The second defendant be restrained from being employed by or otherwise working for DiJones Property Services Pty Ltd, or any business operating under the DiJones brand that is engaged in providing real estate services within a radius of 15 km of 1/55 Kembla Street Wollongong, within a radius of 7.5km of 1/55 Kembla Street Wollongong, other than to provide real estate services in relation to properties outside of that 7.5km radius.
The restraints against the third to sixth defendants now sought are the same, except that they include a radius of 15 kilometres, consistently with the third to sixth defendants' employment contracts, rather than the 7.5 kilometres provided by the second defendant's employment contract.
The carve‑out in the case of the first defendant is more extensive. The order sought in the first defendant's case is as follows: The first defendant be restrained from being employed by or otherwise working for DiJones Property Services Pty Ltd, or any business operating under the DiJones brand that is engaged in providing real estate services within a radius of 15 km of 1/55 Kembla Street Wollongong, other than to provide real estate services in relation to properties outside of that 15km radius, and/or management services in respect of real estate employees and agencies operating wholly or primarily in relation to properties outside of that 15km radius.
The argument on the application centred on two factors: first, the strength of SRE's prima facie case; and second, the balance of convenience. It is convenient to deal first with the restraints sought against the second to sixth defendants.
As will be seen, there is no dispute that DJP is carrying on, or is seeking to carry on, a business which competes with that of SRE within the meaning of the restraint clause. The question at trial will be whether the restraint is a reasonable one. I have already referred to the width of the restraint. In effect SRE has acknowledged the difficulty in maintaining the reasonableness of the restraint in the contractual terms by including the carve‑out in the restraint it seeks.
Counsel for SRE made it clear that this was not simply a concession for the purposes of the application for an interlocutory injunction. SRE will not be claiming relief at trial on a basis more extensive than the restraint which is the subject of this application. It seems to me that this is a sensible acknowledgement on SRE's part that the clause as drafted extends far beyond what is reasonably necessary to protect it from unfair competition in the circumstances of the case.
Counsel for the defendants submitted that even with the carve‑out offered the restraint was still contractually too wide. Counsel referred to the point I have already made, about the uncertainty of the concept of provision of real estate services. Counsel submitted that the proper interpretation of the contractual restraint was that it applied only to a business conducted from an office within the specified radius of SRE's Wollongong office. For his part, counsel for SRE submitted that the proper contractual interpretation was reflected in the carve‑out. In other words, provision of real estate services for the purpose of the contract should be read as provision of services in relation to properties within the relevant radius.
On the argument before me, I doubt that either view is correct. It seems to me that as a matter of language, what the clause requires is that the provision of the real estate services should take place within the specified radius. This means that the interpretation question involves determining where, for the purposes of the contract, real estate services are provided.
Clearly, some real estate services are provided at the location of the relevant property. This would include, for instance, opening the property for inspection, or in the case of a rental property, visiting the property. But other real estate services do not necessarily have to be provided at the relevant property or within any particular distance of it. Sellers may be solicited and buyers may be found outside the relevant area.
More broadly, it seems to me that where the provision of services consists in providing information or advice to the owner, or in soliciting buyers, or in the case of a rental property in dealing with the tenant, the provision of services takes place wherever the agent or perhaps the person being spoken to is. There is no reason to identify the provision of real estate services in relation to a property within the area as necessarily being provided within that area. Similarly, services can be provided outside an office, and there is no reason to limit the provision of real estate services to office activities.
It follows, I think, that DJP is clearly a competing business of SRE, but not on the more limited basis put by counsel in this case. It is a competing business because it is engaged, among other things, in providing services at locations within the relevant radius. This is so despite the fact that much of the valuable work provided, namely solicitation of buyers and advice to owners, does not need to be undertaken from within the radius, and whether it does so or not appears somewhat fortuitous. This further underlines the breadth of the restraint, especially in its application to employees who could just as readily be based in areas outside the relevant radius for the purpose of dealing with customers and potential buyers.
Counsel for SRE submitted that for the purpose of reading down a restraint clause so as to make it reasonable, the Court may adopt any reading down which leaves the restraint wholly within the original contractual terms: see Industrial Rollformers Pty Ltd v Ingersoll-Rand (Australia) Ltd [2001] NSWCA 111 at [165]. If that is correct it would be open to the Court, at final hearing, to adopt the carve‑out in the form put forward by SRE. But it seems to me much more likely that if, as now seems to be conceded, some form of reading down is required, the Court would adopt a reading down which was consonant with the way in which the original contractual limitation had been framed.
In the present case, this would mean that any such reading down would, if it were to involve a limitation on employment activities at all, be read down so as to limit the provision of real estate services to the radius specified in the contract, or some smaller radius. In my view, based on the argument that I have heard, the adoption of a carve‑out which would prevent employment activities relating to all properties within the radius or some lesser area, although theoretically possible, is not at all likely.
There is a second aspect of the strength of the prima facie case which must be considered. It is the adequacy of damages as an alternative remedy: see Ecolab Pty Ltd v Garland [2011] NSWSC 1095 at [6]. The undertakings by the defendants include undertakings to record and retain information about the property transactions with which they are involved. Thus, if SRE ultimately proves able to enforce the restraint, it should be a relatively simple matter to identify any infringing transactions and to assess any damages to which SRE might be entitled as a result of those transactions.
I did not understand counsel for SRE to dispute that this was so. But counsel submitted that there was a further head of damage which could not so readily be assessed. This, in counsel's submission, was the damage generally to the goodwill of SRE which would flow from obtaining multiple infringing sales. Counsel submitted that infringing sales would tend to build up the competing DJP business, which would allow it to generate further non-infringing sales. This, counsel submitted, would result in damage to SRE's goodwill, which would need to be separately assessed.
I acknowledge that in theory counsel may be right. But it seems to me to be a highly speculative argument. That is especially so when one considers how relatively junior the second to sixth defendants are. It must also be borne in mind that, as counsel conceded, I am entitled to proceed on the basis that the Wollongong real estate agency market is a highly competitive one, in which there would be other operators.
In these circumstances it seems to me highly unlikely that it would be possible at trial to establish a measurable indirect effect on SRE's goodwill as a result of sales which were not themselves infringing sales. I think the case for a restraint on this basis is very weak.
Counsel for SRE also sought to support the restraint on the basis of other restraints concerning the use of confidential information. Counsel relied on the well‑known statement by Lord Denning MR in The Littlewoods Organisations Ltd v Harris [1978] 1 All ER 1026, which I quoted in JMB at [67]. Counsel emphasised in this regard the allegations that SRE is making about extensive and coordinated misuse of its confidential information.
That a restraint on future competing employment may be justified by the employer's interest in maintaining the confidentiality of confidential information provided to the employee is well established. But as I said in JMB, I think that the circumstances in which this will be legitimate are limited. I find it difficult to see how the justification can extend beyond information of the sort which cannot be carried around in the employee's head (because information which cannot be so carried around can be the subject of a specific undertaking). Furthermore, it is only where that information would be used in the new employment that the justification is likely to come into play (and even then perhaps only where the information is of the type that the former employee would be practically unable to put out of his or her head).
None of that seems to be suggested here. Rather, counsel's response was to say that having regard to the prior conduct of the defendants, which counsel characterised as flagrant breaches of their confidentiality obligations, I could not be satisfied that they had necessarily complied with their obligations to return the information, or would comply with their obligations not to make use of it.
Counsel did not refer to any authority to support this contention. I do not accept it. Whatever may have gone before (and I am making no finding about that), undertakings have now been given by the defendants and the Court must proceed that they have given those undertakings with full knowledge that if they do not comply with them, they may be severely punished for contempt.
I see no reason whatever to assume, for the purposes of this application, that the undertakings will not be complied with. In these circumstances, the suggested justification for the restraint by reference to the protection of SRE's confidential information falls away.
As to the balance of convenience, there was evidence from each of the defendants which was summarised for me by counsel for the defendants without any objection from counsel for SRE. That evidence shows, as might be expected, that their personal circumstances are different. Two of them were employed with SRE for only three months. Others were employed for longer periods of time and apparently had significant earnings. But I think I can assume that all of them have financial responsibilities and all of them would suffer prejudice if they were to lose their employment with DJP.
Counsel for SRE submitted that there was no reason to think that the defendants would actually lose their employment if the restraints sought by SRE were granted. Counsel pointed out that the restraints as sought would not prevent the second to sixth defendants working on the sale of properties in the Southern Highlands or the Sutherland areas, where DJP also operates or intends to operate.
The difficulty with that submission, however, is that the carve‑out on which it is based was only notified to the defendants shortly before the hearing of the application was to commence, and this was after the time for the defendants to file their evidence in opposition to the application had passed. The defendants, in effect, have had no opportunity to obtain evidence from DJP about what DJP's attitude would be to continuing their employment on the restricted basis suggested by SRE.
Counsel for the defendants complained with some force at the lateness with which SRE has faced up to the difficulties with their initial application to enforce the restraint clause in the defendants' contracts in accordance with its terms, which were exposed by my decision in JMB. Counsel for SRE conceded, very fairly, that SRE could readily have anticipated that those issues would be raised.
As I have already mentioned, it seems plain that the second to sixth defendants were employed by DJP for their knowledge of real estate in the Wollongong area, and presumably so as to staff the office which is to be opened there. In the circumstances, I am not inclined to draw an inference in SRE's favour that the defendants' employment, if restricted in the way proposed by the carve‑out in the restraint, would be acceptable to DJP. I think I must proceed on the basis that there is a serious risk that if the orders sought by SRE are made, the defendants will lose their employment with DJP and that that will expose them to substantial financial prejudice.
In these circumstances, when weighed against the weakness and insubstantiality of the plaintiff's claim for a restraint (as opposed to damages), I think the balance of convenience strongly favours the second to sixth defendants. The application for the restraint against them should be refused.
I turn now to Mr Kersten's position. In his case, the carve‑out has been widened apparently in order to accommodate the fact that he holds what is essentially a managerial position. But I think the wording of the carve‑out leaves something to be desired. It contains at least two uncertainties.
The first flows from the restriction on Mr Kersten providing "management services" which are provided "in respect of" real estate employees and agencies of a particular type. The phrase "in respect of" is notoriously broad. In this context, it is likely to introduce an area of uncertainty in evaluating how particular steps taken by Mr Kersten in the course of managing those who report to him can be said to be steps "in respect of" employees and agencies.
A further degree of uncertainty is introduced by the requirement that such employees or agencies must be "operating wholly or primarily in relation to" properties outside the 15 kilometre radius. If I were to make an order in this form, it would be likely only to generate confusion and debate about how the operations of employees and agencies managed by Mr Kersten relate to properties in a defined geographical area.
What this underlines is that in Mr Kersten's case, DJP's carve‑out is getting even further away from the competition which the clause seeks to prevent. The competition is competition in providing real estate services, but Mr Kersten is a manager and is not himself providing such services at all. Furthermore, his services as manager can be provided anywhere. In my view it is quite unlikely that if there is any reading down of the clause it will be read down in the terms suggested.
Counsel also sought to justify the restraint on the ground that it protects SRE's confidential information. Counsel pointed to evidence that Mr Kersten had been involved in management committee meetings of SRE and in the course of that role had seen SRE's financial statements and perhaps its budgets.
For his part, counsel for the defendants pointed out that Mr Kersten's affidavit states that he did not receive any financial information. While there is room to doubt whether that is in fact the case, counsel submitted that it is clear from the affidavit that if Mr Kersten did see such information he has forgotten it.
I do not find it necessary to go further into these competing contentions. It is true that Mr Kersten was more senior than the other defendants during his employment with SRE. But counsel for SRE acknowledged that Mr Kersten did not operate at the highest level of management.
Again, bearing in mind the competitive nature of the market, I find it hard to see how having viewed financial statements and budgets during his employment with SRE would enable Mr Kersten, even if he does in fact recall that information, to engage in unfair competition against SRE. The circumstances here seem to me to be quite different from the circumstances in Woolworths Ltd v Olson [2004] NSWCA 372 and Pearson v HRX Holdings Pty Ltd (2012) 205 FCR 187, which I discussed in JMB. In those cases, the information was of a strategic nature and the rival employment was one where the employee would be making strategic decisions to which the information would be directly relevant.
So far as the question of damages being an adequate remedy are concerned, the same considerations apply to Mr Kersten as they do to the second to sixth defendants, except that, perhaps, the case against Mr Kersten is even weaker because he is more remote from the supposed damage which may result to SRE's goodwill from the "springboard" provided by infringing sales. Overall, the case for a restraint against him is weak.
So far as the balance of convenience is concerned, the same comments apply as to the possibility of Mr Kersten losing his employment with DJP. And a further point was raised by counsel for the defendants. Counsel referred to the decision of Brereton J, as his Honour then was, in Ecolab, where the former employee had been made redundant by the employer, who then sought to enforce the restraint provisions against him. Brereton J observed that the employer in that case was, in a real sense, the source of its own difficulty, and took that fact into account as a factor against the grant of an injunction.
In the present case, counsel for SRE submitted that there were some factual differences from the situation in Ecolab. Counsel also noted that in Dundoen Pty Ltd v Richard Wills (Real Estate) Pty Ltd [2020] NSWSC 15, a non‑competition restraint had been enforced both at an interlocutory and final level against an employee who had been made redundant by the employer. Counsel acknowledged that in Dundoen, there does not appear to have been any consideration of the point made by Brereton J in Ecolab.
On the argument before me, Ecolab is a considered decision and there will be no reason not to follow it. While, as I have noted, there are some arguable differences in the circumstances, the fact remains in the present case, as counsel acknowledged, that Mr Kersten's employment came to an end as a result of steps taken by SRE. Termination of his employment was not sought by Mr Kersten and was unwelcome to him.
In that sense I think it is fair to say, as Brereton J said in Ecolab, that the circumstances in which SRE finds itself, so far as Mr Kersten is concerned, are the result of its own conduct. That is a further factor to be taken into account against it on this application. However, the point is not of much significance, because even without it, I would have refused the application for an injunction against Mr Kersten.

Shire Real Estate Pty Limited v Kersten

At a glance

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Before

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Judgment (5 paragraphs)

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Cases Cited (6)